by : Business, Featured Articles, May 2014

A Trojan Horse

A Trojan Horse

Amazon, one of the most storied online companies ever, may soon add music streaming to the list of services and industries it is a player in. Since January of this year, reports have been surfacing that it is preparing to compete with Spotify, iTunes Radio, and Rhapsody. It is currently attempting to negotiate with the record labels for catalog. The service, it is felt, would provide benefits to consumers, at least in terms of pricing.

However, the fear is that it might dominate the music industry as it earlier did the book publishing industry. This is because music streaming would add to Amazon’s current movie and television streaming, online books, and general online retailing, and render the giant a one-stop shop for virtually all forms of entertainment (except, in the short-run, video games).

Amazon Books

Amazon first began selling books online in 1996. Now, the website not only sells both print and electronic books, it also publishes them. Beginning with previously self-published and out of print titles, Amazon soon expanded into different genres including mysteries, romance, sci-fi, and translations, and eventually into general fiction and nonfiction.1 Amazon started its venture into book publishing by offering authors a larger percentage of sales, but no advance—thereby taking on very little risk.2 Eventually, though, it became more aggressive and, in one notable move, outbid traditional publishers by $100,000 for a memoir by Penny Marshall, the actress who played Laverne on the 1970s television show Laverne and Shirley.3

The publishing world, notoriously conservative and resistant to change, was suddenly forced to consider digital over print as the dominant form of book publishing. While for some this may have been a welcome evolution, keeping up with the general shift to digital media, others disagreed and criticized the online retailer-turned-publisher. David Streitfeld complained in October 2011, “Amazon.com has taught readers that they do not need bookstores; now it is encouraging writers to cast aside their publishers.”4 Indeed, readers have been turning more and more often to the electronic version of books since the launch of devices like Amazon’s Kindle.

In addition to the convenience of having access to a multitude of titles on one small device, the Kindle came with much lower prices for consumers. Amazon sold popular e-books for download onto the Kindle for $9.99, much less than the $20 or more for the print version. Amazon was able to make prices so low due to its wholesale agreement with the publishers, which gave the publishers half of the list price but no say in what that list price would be.5  This arrangement effectively kept independent bookstores out of the e-book arena because, unlike the massive Amazon, they could not afford to price books at less than $10.6 Amazon’s huge market share allowed it to dominate the competition, for example, by removing all 5,000 of the Independent Publishers Group’s e-books from the site after the group refused to grant Amazon better agreement terms.7

Amazon kept its monopoly on the e-book industry until Apple, in promoting the iPad as an electronic reader, struck deals with publishers allowing them to set the price of the e-books it sold and taking a percentage from that. Unfortunately for Apple, those agreements resulted in a lawsuit from the Justice Department. The Justice Department sued Apple and several publishers—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster—for colluding to fix e-book prices.8 In its supposed attempt to prevent a monopoly, the lawsuit helped Amazon rebuild theirs.

One concern over a company like Amazon having a monopoly on this segment of the book publishing industry is that when it offers books to consumers, it is doing so more to sell its other product, the Kindle, than for any creative value. Additionally, such low prices for consumers can mean lower royalty payments for authors. This is the same concern voiced by some members of the recorded music industry about Amazon’s potential new music streaming service.

Amazon Streams

Amazon’s proposed music streaming service would come carry an additional price tag to the current Amazon Prime subscription service. Amazon Prime subscribers currently pay a yearly fee of $79 for free two-day shipping on Amazon products. The service also includes free streaming of certain movies and television shows. However, most Amazon Prime users do not take advantage of these services even when Amazons spends about $1 billion a year on updates, probably because they are not even aware of their existence.9 Amazon may view music streaming as a way to get customers to see Amazon Prime as more than just a way to get free shipping for online purchases, as well as a justification for raising annual fees.

According Billboard, the service would consist of a different kind of catalog from already established online music streaming services, like Spotify, and result in a different revenue system for record labels. It would be a relatively small catalog containing mostly older songs.10  Amazon is reportedly offering labels a fixed yearly amount to license their songs. That amount would be paid out pro rata based on the number of plays each labels’ songs receives.11 According to Billboard, Amazon is offering independent labels $5 million a year and major labels $25 million.12 It may seem like large numbers, but they are miniscule in comparison with the supposed $800 million in additional revenue that Amazon would receive from raising the Prime price from $79 to somewhere between $100 and $150.13 Record labels are concerned about licensing their songs and helping Amazon gain customers by providing more bonuses for prime subscribers without sharing in the newly created value. They also fear they are indirectly aiding Amazon in harming rival streaming services that also pay the labels to license songs.14 Despite some record label executives’ reluctance to accept the terms Amazon is reportedly offering, they might not have much choice given Amazon’s power in the music industry as one of the largest retailers of CDs and downloads.15

Negotiations are still taking place and Amazon has not yet got record labels to accept terms, but it appears to be following the same route it did when it began its book-publishing venture. The strategy is not that different. Amazon has recently hired several music business veterans as executives, similarly to when it hired Larry Kirshbaum, the former CEO of the Time-Warner Book Group, to lead Amazon Publishing in 2011.16 In 2012, Amazon hired Michael Paull, a Sony music executive, as the head of music operations and Drew Denbo, who formerly handled business development for Rhapsody and other streaming services, to handle its business development.17 Then, in 2013, Amazon hired Adam Parness, who formerly handled licensing at Rhapsody.18

One Stop Shopping

Amazon has already used its market share to sway the book publishing market against content creators and it could do the same with the music industry. The record labels, and by extension artists, will have to stand firm, for, without them, there would be no music for Amazon to stream. On the other hand, consumers will likely be attracted to the idea of an all-in-one entertainment source for movies, television, and books (even if Amazon’s fee seems expensive). How Spotify would fit into the mix remains to be seen. If the new model for music acquisition shifts massively towards access rather than ownership, there should be room for both. Long-term, thought, buyers have sought produce from one source, and the Walmarts of this world have left the single product store in the dust. Such could be the power, for good and bad, of Amazon.

By Amanda Ruggieri

Endnotes

1. Eric Scigliano, Meet the producer: Will Amazon dominate book publishing, too?, Crosscut (January 28, 2012), http://crosscut.com/2012/01/18/amazon/21803/Meet-producer-Will-Amazon-dominate-book-publishing/.

2. Ibid.

3. Ibid.

4. Ibid.

5. David Carr, Book Publishing’s Real Nemesis, NY Times (April 15, 2012), http://www.nytimes.com/2012/04/16/business/media/amazon-low-prices-disguise-a-high-cost.html?pagewanted=all&_r=0.

6. Ibid.

7. Ibid.

8. Ibid.

9. Kevin Krause, Amazon to launch Prime streaming music service? (February 28, 2014), http://phandroid.com/2014/02/28/amazon-prime-streaming-music/.

10. Ed Christman. Amazon Lowballs Labels with ‘Insane’-ly Puny Offer. Billboard (March 10, 2014), http://www.billboard.com/biz/articles/news/digital-and-mobile/5930330/amazon-lowballs-labels-with-insane-ly-puny-offer#SwFokDDewslhmZ7v.14.

11. Ibid.

12. Ibid.

13. Ibid.

14. Ibid.

15. Ibid.

16. Steve Wasserman, The Amazon Effect. The Nation (May 29, 2012), http://www.thenation.com/article/168125/amazon-effect#.

17. Peter Kafka, Amazon Talks to Music Labels About a Streaming Service, Recode (February 27, 2014), http://recode.net/2014/02/27/amazon-talks-to-music-labels-about-a-streaming-service/.

18. Ibid.

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